Wednesday, March 30, 2011

You might think property taxes have declined 30%, paralleling declines in housing values. But nope--property tax revenues have shot up 27% just since 2006.

Something remarkable happened to property taxes in the U.S. while housing lost 31% of its value from 2006 to 2009: they went up by $100 billion (27%). Equally remarkably, as we can see from this U.S. Census Bureau data on state and local tax revenues, property taxes went up even when housing slumped in the early 1990s.

So though U.S. housing continues losing value--U.S. home prices declined in January,continuing a downward trend that began in August, with average U.S. home prices retreating to summer 2003 levels, according to the S&P Case-Shiller home-price indexes--property tax revenues continue their inexorable rise.

I've plotted out the total national property tax revenues on a chart of the Case-Shiller home-price index.

According to the Bureau of Labor Statistics inflation measures, if property taxes had risen along with inflation, the total property tax revenues nationally would have risen from $210 billion in 1996--more or less about the start of housing's decade-long bubble--to $296 billion in 2011.

So even as the net worth of property has fallen by a third, the property taxes collected from the owners have risen 27%. Exhibit A in this ceaseless rise of property tax revenues is the structural shortfalls in state and local government budgets between what was promised to various fiefdoms and constituencies at the apex of various bubbles, and what is sustainable in non-bubble times. Here is a chart of California's systemic gap between revenues and expenditures. Please note that the apparent alignment of revenues and expenditures in 2010-11 is entirely illusory: the budget gap is $26 billion or perhaps more, once the fantasy accounting is removed.

And here is a chart of house prices in a classic symmetrical post-bubble deflation. I've drawn a target which is drawn from the reversion-to-the-mean model that the majority of bubbles track: prices don't just retrace to the starting lift-off point, they overshoot to a level below that initial line.

As I reported in House Values Fall 30%, But Property Taxes Keep Rising (December 22, 2010), the nation's state and local governments will collect an estimated $476 billion in property taxes in 2010--about 90% of state income tax revenues of $250 billion and sales tax revenues of $286 billion combined.

A decade ago, property taxes were roughly equivalent to sales taxes. In 2000, property taxes totaled $247 billion and sales taxes came in at $223 billion-- a differential of roughly 10%. Sales taxes have increased by 28% since 2000-- roughly in line with the rise in consumer prices.

State income taxes have risen nationally from $217 billion in 2000 to $250 billion in 2010, after peaking at $303 billion in 2008, just as the global financial meltdown began. That's a rise of $33 billion, or 15%--actually less than inflation (27% from 2000 to 2010).

Add all this up and we can see that local governments have become far more dependent on property tax revenues than they were in 2000. Thanks to stiff increases in junk fees and taxes of all kinds, state and local government revenue has climbed back to its pre-recession height of $1.29 trillion, roughly equal to the $1.32 trillion collected in 2008. In terms of total tax revenue, the recession is over--yet the gap between expenditures and revenues continues to widen in most states and local governments.

As their properties continue sliding in value, devastating their net worth, do you reckon the average homeowner might start resenting the rapid rise of the taxes they pay for the privilege of owning real estate?

Imagine if your income taxes rose by 27% even as your income declined by 30%.

The ultimate tax hostage is the property owner. The business owner can pull up stakes and leave, the wage earner can transfer or get another job elsewhere, and the consumer can restrict his/her consumption to lower the burden of sales taxes, but the property owner is the perfect tax donkey because the transaction costs of selling are so prohibitive.

With some 11 million homeowners owing more on their mortgage than their house is worth, i.e. they are underwater, then selling is no longer an option unless the bank accepts a short-sale--something the lenders are loathe to do.

Given that there's about 48 million mortgaged homes now, then those 11 million represent about 23% of all homeowners.

How long will property owners keep swallowing significantly higher property taxes even as the value of their real estate continues declining? It's an open question. I suspect the answer won't be known until some invisible breaking point is reached, and voters simply rebel against higher taxes while their own net worth and incomes stagnate.

Just because there is little visible resistance to sharply higher property taxes (and other taxes and junk fees as well, of course) doesn't mean resistance isn't building below the surface, unreported by a financial media obsessed with the S&P 500 as the only metric of wealth and prosperity and unnoticed by state and local governments obsessed with stripmining more tax revenues by any means at hand.

The tax donkey is already weighed down with a heavy load, and it won't take much more than a double-dip recession, higher prices for essentials and declining home values to snap the pack animal's weakened back.

The rising S&P 500 looks good as propaganda, but for most Americans, that's about as edible and nourishing as an iPad.

Long-time financial supporters of this site: email me if you'd like to receive the (subscribers-only) Weekly Musings email.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:

Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Adsense and Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative)If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.

Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted

Weekly Musings Reports

"What makes you a channel worth paying for? It's actually pretty simple - you possess a clarity of thought that most of us can only dream of, and a perspective that allows you to focus on the truth with laser-like precision." Jim S.

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Contribute via PayPal

Why I gratefully accept donations and why you might want to donate:

A 95-minute movie with 10 minutes of ads and a small popcorn costs $25.
If you enjoyed this site for at least 2 hours this year, and you donate $25, you already received more entertainment than you did from the movie. The other 100+ hours of enjoyment you receive here is FREE.

Subscribers and donors of $50 or more this year will receive exclusive weekly Musings Reports.

You have the immense moral satisfaction of aiding a poor dumb writer who seeks to inform, entertain and amuse you.